Sunday, February 21, 2016

"Commodities' $3.6 Trillion Black Hole"

From BloombergGadfly, Feb. 18, 2016:

Markets rallied this week after it became clear that some of the
world's biggest oil producers were going to curb production to stop
prices from dropping any further. The news also buoyed other
commodities, from coal to iron ore. Then everything dropped on Thursday
with oil.

Before the global financial crisis, a rise in
raw-materials prices used to be bad news for the economy and stocks in
general. Since central bank easy-money policies took off, that's become a
thing of the past:

Odd Couple

The Bloomberg Commodity
and the MSCI World stock indexes have increasingly moved together,
reversing their previous inverse relationship

One possible explanation is the level of exposure that banks and
investors have to the industry. The 5,000 biggest publicly traded
companies tracked by Bloomberg in the iron and steel, metals and mining,
and energy sectors have a combined $3.6 trillion in debt, according to
their most recent financial reports, double what they had at the end of
2008.

Much of the increase is due to money that was borrowed to dig mines
and wells whose output, at previous prices, would have easily repaid
most maturing bonds and loans. But as commodity prices have tumbled, so
has the ability of companies to meet their obligations. The Bloomberg
Commodity Index is still only 3.9 percent higher than a 25-year low hit
on Jan. 20.

Five years ago, those companies tracked by Bloomberg
had more operating income than debt, on average. Now, it would take them
more than eight years' worth of current earnings, without provisioning
for interest, taxes, depreciation or amortization, to clear their
combined net obligations.

Slipping Prices

A broad measure of raw material prices reached a 25-year low on Jan. 20, adding to pressure on producers

Yield-hungry bond investors sucked up a lot of the debt that was issued and now hold about $2.1 trillion of outstanding notes....MORE